Provident Financial Holdings, Inc. (NASDAQ:PROV) Q3 2024 Earnings Report Call Transcript April 30, 2024
Provident Financial Holdings Inc. wasn't among the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
operator: Thank you for your cooperation. My name is Kathleen. She will be the conference operator today. We would like to welcome you to Provident Financial Holdings' third quarter 2024 earnings call. [Operator Instructions] I would now like to turn the call over to our President and CEO, Donavon Ternes. Please move on.
Donavon Terns: good morning. My name is Donavon Ternes, President and CEO of Provident Financial Holdings. On the call is Tam Nguyen, our senior vice president and chief financial officer. Before we begin, there are some administrative matters that need to be briefly explained. Today's presentation discusses our business prospects and includes forward-looking statements. These statements include statements regarding management's plans, future operations, product or service objectives or objectives, projections of financial or other performance measures, and the Company's general outlook regarding economic and business conditions. . We may also make forward-looking statements during the question and answer period following management's presentation.
These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those discussed today. Information regarding the risk factors that could cause actual results to differ from those in forward-looking statements can be found in the Financial Results Release distributed yesterday, Annual Report on Form 10-K for the year ended June 30, 2023. It can be obtained from the book. Form 10-Q and other SEC filings subsequently filed on Form 10-K. Forward-looking statements are valid only as of the date on which they are made, and we undertake no obligation to update this information. First of all, thank you for joining the call. We hope you have had the opportunity to view our financial results release describing our third quarter results.
In the most recent quarter, we raised $18.2 million in loans held for investment purposes, which was down from $20.2 million in the prior quarter. The most recent quarter had loan principal payments and payoffs of $28.5 million, an increase from $17.8 million in the December 2023 quarter, but still at the low end of the quarterly range. Currently, many real estate investors appear to be scaling back their activities due to rising mortgage and other interest rates. Additionally, rising fixed-rate mortgage rates are likely increasing consumer demand for adjustable-rate mortgage products for single-family homes. We have tightened our underwriting requirements generally and increased prices across all product lines in response to increased funding costs, the current economic environment and tighter liquidity conditions.
Additionally, our single-family and multifamily loan pipelines are similar compared to prior quarters, with loan originations in the June 2024 quarter similar to this quarter and at the lower end of the recent quarter's range ($18 It is suggested that it will be (between). $1 million and $75 million. For the three months ended March 31, 2024, loans held for investment purposes decreased by approximately $10 million compared to December 31, 2023, due to declines in single-family, multifamily, and commercial real estate loan categories. were partially offset. Commercial business and construction loans. Credit quality has remained very good and non-performing assets have increased from his $1.8 million at December 31, 2023 to his $2.2 million as of March 31, 2024. You can see that there are.
Additionally, the initial delinquent balance as of March 31, 2024 is only $388,000. Although we are aware of heightened concerns regarding commercial real estate loans, particularly offices, we believe that the underwriting characteristics of our borrowers and collateral continue to perform well. good. We outline these characteristics on slide 13 of our quarterly investor presentation. This shows that our exposure to various office types is his $41.8 million, or his 3.9% of loans held as an investment portfolio. We also note that we only have six of his $3.4 million CRE loans maturing in the remainder of 2024. The Company recorded a $124,000 reserve for credit losses in his March 2024 quarter. The allowance for credit losses recorded in the third quarter of FY24 was primarily due to higher market interest rates and lower loan prepayment estimates that extended the estimated useful life of the consumer loan portfolio, while the This is due to a decrease in the balance. As of March 31, 2024, it decreased by 1% from $1.08 billion as of December 31, 2023 to $1.07 billion.
The allowance for credit losses on total loans held for investment increased from 65 basis points as of December 31, 2023 to 67 basis points as of March 31, 2024. Our net interest margin decreased 4 basis points to 2.74% for the quarter ended March 31st. , 2024 was the result of an 8 basis point increase in the average yield on gross interest-bearing assets and a 17 basis point increase in the cost of gross interest-bearing debt in 2024 compared to the consecutive quarter ended December 31, 2023. Specifically, average deposit costs for the quarter ended March 31, 2024 increased 19 basis points to 118 basis points, compared to 99 basis points in the prior quarter. Additionally, borrowing costs increased by 12 basis points in the March 2024 quarter compared to the December 2023 quarter.
Net interest margin for the quarter was negatively impacted by approximately 1 basis point as a result of higher net deferred loan costs associated with loan repayments in the March 2024 quarter compared to average net deferred loan cost amortization over the previous five quarters. I received it. New loan originations have recently begun at higher mortgage rates than in prior quarters, and variable rate loans within our portfolio have adjusted to higher interest rates compared to existing rates. Approximately $98.2 million of loans were adjusted upward by 89 basis points from a weighted average rate of 6.98% to 7.88% in the June 2024 quarter, and current estimates suggest that approximately $108.4 million of loans will be adjusted upward in the September 2024 quarter. It will be repriced. 89 basis points would result in a weighted average interest rate of 7.71% to 8.06%.
However, many variable rate loans in all categories currently have fixed rate caps that limit upward adjustments. We would also like to point out that as a result of current market conditions, where current interest rates have been lower for more than 12 months, there is an opportunity to reduce the price of mature wholesale funds. All of this suggests that the current pressure on net interest margins may ease soon. We continue to strive to improve operational efficiency across the company to reduce operating expenses. As of March 31, 2024, the number of FTEs increased from 160 FTEs on the same day last year to 161 FTEs. We can see that operating expenses decreased to $7.2 million in the March 2024 quarter. This is consistent with a steady operating rate of approximately $7.2 million per quarter.
For fiscal year 2024, we continue to expect a draw rate of approximately $7.2 million per quarter. But in reality, his actual run rate for his first three quarters from fiscal year to date was slightly lower at $7.1 million per quarter. Our short-term strategy for balance sheet management will be slightly more conservative than in previous years. Given tight liquidity conditions and the inverted yield curve, we believe that slowing the growth of the loan portfolio is the best course of action at this time. We successfully executed this strategy during the quarter, with loan originations remaining at the low end of the quarterly range and loan repayments remaining at the low end of the quarterly range. The composition of interest-bearing assets reflects a slight decrease in the average balance of loans and a decrease in the average balance of low-yield investment securities.
In addition, although the average balance of deposits decreased, the composition ratio of interest-bearing debt improved slightly due to a large decrease in the average balance of loans payable. Our strong capital ratios allow us to execute our business plans and capital management objectives without complexity. We believe that maintaining cash dividends is very important. Additionally, we recognize that prudent return of capital to shareholders through our share repurchase program is a responsible capital management tool, and we repurchased approximately 50,000 shares of our common stock in the March 2024 quarter. Fiscal year to date, the Company has distributed approximately $2.9 million in cash dividends to stockholders and repurchased approximately $2.0 million worth of common stock.
As a result, our capital management activities resulted in the distribution of 91% of our year-to-date net income. We encourage you to view his March 31st investor presentation posted on our website. You can see that it includes slides on financial metrics, asset quality, and capital management. We believe this provides further insight into the company's strong financial foundation to support its future growth. Now, I would like to take your questions regarding the financial results. Kathleen?
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